Velocity of Money Concept

Velocity of Money (or speed of money circulation), concept created in the beginning of the 19th century by Alfred Marshall and Irving Fisher, measures the speed with which the money circulates in the economy and is at the base of monetarism. When the money quantity is big relatively to the expenditure flow, the currency speed is higher; when the money quantity is small relatively to the expenditure flow, the money speed is lower.

 

Calculation Formula

More precisely, the Velocity of Money corresponds to the rate at which the currency quantity “rotates” relatively to the economy total product and can be calculated as the ratio between the GNP and the currency quantity:  

V = GNP/M = (P.Q)/M

In which V represents the Velocity of Money, P the market prices, Q the quantity of products traded in the economy and M the money quantity.

 

Velocity of Money and Monetarism

According to the monetarists, and according to the Prices Quantitative Theory, the currency speed is relatively stable, for which the prices general level is directly determined by the currency quantity available in the economy.

 

 

Translated from Portuguese by Susana Saraiva, Portuguese-English and English-Portuguese translation specialist. Contact: spams@sapo.pt.